Japan 10Y Yield Rises as Mideast Tensions Flare

Japan’s 10-year government bond yield climbed to around 2.48% on Friday, reversing the prior session’s decline as renewed US-Iran clashes in the Strait of Hormuz lifted geopolitical risk and revived inflation concerns. Three US Navy destroyers transiting the strategic waterway reportedly intercepted Iranian attacks and conducted retaliatory strikes, although President Donald Trump said the ceasefire remains in effect. In Japan, data showed real wages rose for a third consecutive month in March, reinforcing expectations that the Bank of Japan could continue tightening policy even as the Middle East conflict adds uncertainty to the growth outlook. Meanwhile, minutes from the BOJ’s March meeting suggested policymakers see room for additional rate hikes if an Iran-related energy shock persists and sustains broader inflationary pressures.

Japan’s 10-year government bond yield fell to around 2.49% in post-holiday trading on Thursday, easing back from 29-year highs as oil prices fell sharply on signs that the US and Iran were closing in on an agreement to end the war and potentially reopen the Strait of Hormuz. That reduces pressure on Japan’s economy which relies heavily on oil imports from the Middle East, while also providing the Bank of Japan greater flexibility in normalizing monetary policy. Meanwhile, minutes from the BOJ’s March meeting indicated that policymakers saw scope for additional rate hikes if the Iran-related energy shock persisted and continued to drive broader inflationary pressures. Elsewhere, the yen strengthened again on what markets suspected to be another round of intervention from Tokyo. Currency moves have taken on added significance for policymakers, given the impact of a weaker yen on imported inflation and its direct effect on household purchasing power.

Japan’s 10-year government bond yield held above 2.5%, hovering at its highest levels since 1997, as surging oil prices driven by the Middle East conflict fueled inflation concerns and increased expectations that major central banks may need to raise rates. The move came after Trump said the US would maintain its naval blockade on Iran until a nuclear deal is reached, dampening hopes for a resolution to the conflict. Last week, the Bank of Japan kept its policy rate unchanged at 0.75% as it continues to balance persistent inflation risks against growth headwinds linked to the Middle East situation. However, 3 of 9 board members supported a rate hike, while Governor Kazuo Ueda reiterated the central bank’s commitment to gradual policy tightening. Further depreciation of the yen could also intensify pressure on the central bank to raise rates, though the government stepped in to boost the currency this week. Japanese markets will be closed until May 6 for public holidays.